Macroeconomic and Welfare Costs of U.S. Fiscal Imbalances

Author/Editor: Bertrand Gruss ; Jose L. Torres
Publication Date: January 01, 2012
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: In this paper we use a general equilibrium model with heterogeneous agents to assess the macroeconomic and welfare consequences in the United States of alternative fiscal policies over the medium-term. We find that failing to address the fiscal imbalances associated with current federal fiscal policies for a prolonged period would result in a significant crowding-out of private investment and a severe drag on growth. Compared to adopting a reform that gradually reduces federal debt to its pre-crisis level, postponing debt stabilization for two decades would entail a permanent output loss of about 17 percent and a welfare loss of almost 7 percent of lifetime consumption. Moreover, the long-run welfare gains from the adjustment would more than compensate the initial losses associated with the consolidation period.
Series: Working Paper No. 12/38
Subject(s): Debt reduction | Economic models | Fiscal consolidation | Public debt | Welfare

Author's Keyword(s): Fiscal imbalances | government debt | growth | crowding out | fiscal consolidation | welfare.
Publication Date: January 01, 2012
ISBN/ISSN: 9781463933814/1018-5941 Format: Paper
Stock No: WPIEA2012038 Pages: 35
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